So much for high-yielding telecommunications stocks offering safe places to hide in a market rout.

Shares in Spain’s
Telefónica
have plunged by about one-quarter over six months, underperforming the country’s broader market. Disappointing results took the stock 4% lower Friday, to the trough seen during the 2012 eurozone recession.

That, in turn, has pushed the dividend yield above 8%. While Telefónica considers the dividend sacred, investors are clearly fearful a payout cut may be needed. It most likely is.

To avoid a cut, too much has to go right for Telefónica. And that means the stock may not be out of the woods yet.

The challenge for the group is reducing debt. Net debt rose 11% last year to just under €50 billion ($55.1 billion)—about €2 billion more than
Barclays
was expecting. That is 2.91 times earnings before interest, taxes, depreciation and amortization, well above the company’s target maximum of 2.35 times.

To hit its target, the company plans to sell its U.K. arm, O2, to Hutchison Whampoa’s Three for £10.5 billion ($14.66 billion). That would reduce debt to 2.38 times Ebitda.

The European Commission is due to rule on the deal in April, but the U.K. telecom regulator already has made its opposition to consolidation clear. A required sale of assets to a new fourth player could be a condition of the merger, potentially undermining Three’s interest.

Ratings companies might then cast doubt over Telefónica’s credit rating, currently two notches above junk. Finance chief Angel Vilá Boix said he has a confidential Plan B to reassure the agencies, should the U.K. deal fall through.

Earlier this month, the company announced the creation of an infrastructure company, Telxius, that will own Telefónica’s submarine cables and some of its towers. Selling stakes to third-party investors would raise cash—but not as much as selling O2. Even if the U.K. sale does go through, the company’s balance sheet is stretched. Almost 70% of Ebitda last year came from Latin America where inflation is buoying constant-currency growth but eroding the value of local money. Most of Telefónica’s debt is denominated in euros, so plummeting emerging-market currencies boost the company’s leverage.

Telefónica pays an annual dividend of 75 euro cents per share (albeit only 40 cents in cash—the rest is scrip). Last year, it generated free cash flow of 71 euro cents a share.

However, that figure excludes costs related to an ongoing redundancy plan. Add these back, and free cash flow falls to just 57 cents per share. On that basis, the difference between free-cash flow and the dividend payout rises to nearly €900 million versus around €200 million.

In light of that, and the strained balance sheet, the payout may have to give. In the financial markets, nothing is sacred.

Corrections & Amplifications

A previous version of this article misspelled the name of Telefónica finance chief Angel Vilá Boix.